What To Do When Your Mortgage Gets Declined After Conditional Approval

Getting a mortgage declined after receiving conditional approval can be a frustrating and confusing experience. As a homebuyer, you think you are on the path to purchasing your dream home after getting conditionally approved. Then out of the blue, you receive the devastating news that your loan was denied.

This situation leaves many questions racing through your mind – Why did this happen? What did I do wrong? Is there anything I can do now? Take a deep breath, don’t panic There are steps you can take to understand what went wrong and get your home loan back on track.

In this article, I will walk you through everything you need to know about conditional mortgage approvals, reasons for denial after conditional approval, and most importantly, tips to avoid this situation and get your loan approved.

What Exactly is Conditional Approval?

Before diving into reasons for denials, let’s understand what conditional approval means in the first place.

When you apply for a mortgage loan, your application goes through a process called underwriting. This involves the lender reviewing your financial paperwork, income docs, credit history etc. to decide if you qualify for the loan amount you need.

At the end of underwriting there are three possibilities

• Direct approval – The underwriter approves your loan application as-is,

• Denial – The underwriter rejects your application completely.

• Conditional approval – The underwriter approves your application but with certain conditions you need to fulfill.

Conditional approval means you are very close to getting your mortgage, but there are still some boxes you need to tick off before the lender gives you the green signal.

Some common conditions include:

• Providing additional pay stubs or bank statements

• Clarifying inconsistencies in your paperwork

• Paying down existing debts to improve debt-to-income ratio

• Bringing more money for downpayment if required

• Obtaining homeowners insurance

• Getting the appraisal done on time

You will get a list of such requirements from the lender that you must complete within a given timeframe, usually 2-3 weeks. Only after you satisfy all conditions will you receive the final loan approval.

Why Do Loans Get Denied After Conditional Approval?

Now that you know what conditional approval entails, let’s look at reasons why lenders deny loans even after giving conditional approval:

1. Failure to meet stipulated conditions

The most obvious reason for denial after conditional approval is failure to meet the conditions outlined by the underwriter within the specified time. For instance, if the underwriter asks you to pay off an existing credit card debt and you don’t, it can lead to a denied mortgage.

Similarly, if you are required to submit additional financial docs which you fail to provide in time, it can result in a rejected loan. Failing to complete stipulated conditions essentially leads the underwriter to reconsider their decision and decline your application.

2. Credit issues

Lenders will pull your credit again before final approval. If your credit score has dropped significantly or you have acquired additional debts, it can change the underwriter’s decision and cause your loan to get denied.

Things like missing payments, maxing out credit cards, taking on new loans etc. are big red flags.

3. Employment changes

Any changes to your employment status can lead to a rejected mortgage after conditional approval. This includes leaving your job, getting demoted or taking a pay cut. Since underwriting verifies your income docs initially, any change can result in denials.

4. Insufficient documents

While you may provide all required docs to the underwriter, sometimes they are insufficient. For example, your bank statements may not have enough funds to prove your downpayment ability. Or your income proof may still leave some questions unanswered.

Such issues with your paperwork can lead the underwriter to change their decision, even after issuing a conditional approval.

5. Appraisal problems

If the home appraisal comes back with a value lower than the contracted purchase price, it becomes a roadblock. The underwriter cannot approve a mortgage amount higher than the appraised value.

Unless you renegotiate the purchase price or bring in more money, such appraisal issues lead to denied loans.

How to Avoid Getting Denied After Conditional Approval?

Now that you know the major reasons for mortgage denials after conditional approval, here are some tips to avoid landing in this unpleasant situation:

• Read your approval letter carefully – Make sure you understand each condition and their timelines. If anything is unclear, get clarification from your loan officer.

• Stay organized – Maintain proper files for all documents needed for your loan file. Being organized will help you submit conditions efficiently.

• Act fast – As soon as you get the conditions list, work on fulfilling them right away. Do not wait for the last minute. Meeting tight timelines becomes easier with prompt action.

• Avoid new debts – Until you close on the home, freeze all non-essential spending. Don’t apply for new credit cards or loans which can negatively impact your approval odds.

• Don’t change jobs – Try not to switch jobs or roles while your loan is under process. It can significantly delay the proceedings. Inform your loan officer if any change is unavoidable.

• Keep balances low – Try to pay off credit card bills in full each month. High revolving credit utilization affects your credit score which can lead to denials.

• Communicate regularly – Maintain open communication channels with your loan officer. Update them on any changes in your situation for best results.

Following these dos and don’ts will help you avoid unfavorable situations that cause lenders to change their minds after giving conditional approval. Work closely with your loan officer and you can get unconditional approval smoothly.

What to Do If Your Loan Gets Denied After Conditional Approval?

So what can you do if despite your best efforts, you end up with a denied mortgage after conditional approval? Here are some options to consider:

Request reconsideration – Politely ask your loan officer to reconsider your application and explain the circumstances. For instance, if your credit score dropped slightly, point out it is still well within the approved range. Or if you faced difficulty getting documents on time, show how you have fulfilled the conditions since then. Demonstrate why you are still a viable borrower.

Appeal the decision – Every lender has an appeals process you can leverage to dispute a denial. Draft a formal letter highlighting reasons why you deserve to be approved and submit supporting documents. Be persistent yet professional in your appeals communication.

Apply with another lender – One lender’s rejection doesn’t mean all doors are shut. Every lender has their own underwriting guidelines. Discuss your situation with mortgage brokers to find a lender more likely to approve your profile.

Bring a co-signer – Adding a co-signer with better finances can sometimes tilt a “No” to a “Yes”. If your loan got denied due to insufficient income or credit score, this is an option if you know someone willing to co-sign the mortgage.

Improve your finances – Use the denial time to work on boosting your credit score or saving up more for the downpayment. Then reapply in a few months when your financial profile has improved.

Offer corrections – Find out the exact reasons for denial and work towards correcting those. For instance, if your income proof was inadequate, supplement it with additional documents to strengthen your case.

Adjust your goals – If the loan amount or property is out of your reach currently, consider lower priced alternatives that match your financial capacity better. With a smaller loan amount, you have better approval chances.

The key is to be patient and persistent. Reach out to your existing lender first before exploring other options. There are always ways to appeal a mortgage denial – don’t lose hope. With prudence and perseverance, you will be able to get your home loan back on the right track.

Common Mortgage Approval Terminology

Since we referred to different types of mortgage approvals in this article, let’s do a quick recap of some key terminology related to the home loan approval process:

• Prequalification – Getting a prequalification letter by submitting basic personal finance information to a lender. It offers a ballpark estimate of how much you may be able to borrow.

• Preapproval – The lender verifies your financial history, income, and credit score to assess your actual mortgage eligibility. It is more reliable than prequalification.

• Conditional approval – The underwriter approves your mortgage application tentatively but with certain conditions you need to fulfill for final approval.

• Clear to close – This means you have fulfilled the stipulated conditions and the underwriter gives the green signal to proceed with closing the loan.

• Final approval – After you have accepted the clear to close status and signed the final loan documents, the lender grants the formal final approval. This means you can move towards the loan closing!

The Takeaway

Getting declined for a mortgage after going through the rollercoaster of conditional approval can be upsetting. But with greater awareness about the reasons behind such denials and a prudent approach, you can avoid landing in this predicament.

Work closely with your l